Insurers Dispute Sharing of Defense in Construction Defect Case

    The California Court of Appeal affirmed the trial court's decision that the defending insurer was not entitled to reimbursement of defense costs from another insurer based upon a subcontract and additional insured endorsement. Zurich Am. Ins. Co. v. Old Republic Gen. Ins. Corp., 2024 Cal. App. Unpub. LEXIS 1261 (Cal. Ct. App. Feb. 28, 2024). 

    Martin McNerney Development Company (McNerney) entered a construction contract to perform seismic upgrades and tenant improvements for condominiums. McNerney and Broadway Mechanical Contractors, Inc. (Broadway) entered a "Subcontract Agreement" under which Broadway was to perform plumbing work at the project. The agreement required Broadway to maintain general liability insurance naming McNerney as an additional insured for work performed on the project, including completed operations. The subcontract also required Broadway to indemnify and hold McNerney harmless with respect to all claims for damage to property arising out of work performed by Broadway. 

    Broadway completed its work on the project in September 2007. Broadway issued a one-year warranty for its work on the project. 

    Zurich insured Broadway under commercial general liability policies from September 2003 through September 2008, and again from September 2009 through September 2011. Old Republic insured Broadway under policies issued between September 2011 and September 2016. The Old Republic policies contained an "Additional Insured" endorsement covering liability arising from Broadway's completed operations. It was undisputed that Broadway finished its work on the project long before the inception of the Old Republic policies.    

    The completed operations endorsement did not identify who was an additional insured. Instead, it provided coverage for additional insureds "where required by written contract, but only when coverage for completed operations is specifically required by the contract." 

    In 2016, the homeowners' association sued McNerney alleging construction defects, including plumbing defects and resulting damages that occurred at an unspecified time. McNery cross-complained against a number of subcontractors, including Broadway. McNerney sought recovery from Broadway under the express indemnity provision of the subcontract. In response to Broadway's tender, both Zurich and Old Republic defended Broadway in the construction defect action, equally splitting defense expenses. 

    Zurich also agreed to defend McNerney as an additional insured and paid in excess of $430,000 to defend McNerney. Old Republic did not participate in McNerney's defense. 

    In 2018, the homeowenrs' association and Broadway reached a settlement. Zurich and Old Republic equally funded the settlement on behalf of Broadway. The two insurers also equally funded the settlement of McNerney's cross-complaint against Broadway.

    Zurich brought this action, seeking reimbursement from Old Republic for an equitable share of McNerney's defense fees and costs. Old Republic argued McNerney was not an additional insured under its policy. The court agreed.

    The completed operations endorsement did not specifically identify who was an additional insured. Instead, it defined an additional insured as a person or organization that Broadway "is required by contract or agreement" to name as an additional insured "but only when coverage for completed operations is specifically required by that contract." Therefore, Broadway must have had an existing contractual obligation to name an organization as an additional insured while the Old Republic policies were in effect.  

    The subcontract stated Broadway was required "at all times" to carry liability coverage for "product or completed operations" and to name McNerney as an "additional insured . . . with respect to liability arising out of work or operations performed by Broadway . . . until the work under this Agreement is fully completed." Broadway completed its work in 2007. The subcontract, therefore, set forth the period of time that Broadway was required to provide additional insured coverage for McNerney. 

    It was undisputed that the challenged policies provided completed operations coverage to additional insures where required by contract. The language of the completed operations endorsement and the related subcontract, however, established McNerney was not an additional insured under the Old Republic policies.